Despite a temporary de-escalation of hostilities following the G-20 summit, the relationship between the US and China will remain contentious, says Moody’s Investors Service in a new report.

Narrow agreements and modest concessions in the ongoing trade dispute will not bridge the wide gulf in their respective economic, political and strategic interests.

At the G-20 meetings that concluded on December 1, the US and China agreed to continue trade negotiations, during which the US will suspend for 90 days the planned increase in tariffs targeted for January 2019, and China will increase imports from the US.

Despite this temporary de-escalation of hostilities, Moody’s expect the relationship between the world’s two
largest economies to remain contentious.

“The US and China have differences that are deep and multi-faceted, leading to diverging national and commercial interests,” says Moody’s Managing Director Atsi Sheth. “As China increases its influence in global economics and politics and the US retrenches its international engagement, the relationship between the two powers has entered a new, tense and uncertain phase.”

Differences in strategic objectives between the two will affect credit conditions in four key areas: Trade, technology, investment and geopolitics.

The rating agency says relations between the two countries will swing between conflict and compromise.

The impact of US-China tensions on credit conditions will be felt at the global, country, sector and company level. A worsening of tensions would disrupt global trade, erode the effectiveness of the international multilateral trade regime and dampen growth. Financial market volatility will affect valuations and borrowing costs for many debt issuers.

The military has helped in mediating informal debts owed by over half a million people and has managed to return to the debtors over 5,000 land title deeds involving more than 20,000 rai of land held by their creditors as collateral according to Thai News agency ThaiPBS

Household debt tripled since 2005

In 2005, householddebtamounted to 3.4 trillion baht. Today, the amount has more than tripled. Thai households now owe 10.8 trillion baht to financial institutions.

Consumer borrowing is accelerating significantly in Thailand and around a quarter of consumers are having trouble making repayments on their debts, with credit cards and car loans the main areas of concern, according to an FT Confidential Research survey.

According to Bank of Thailand data on household borrowing in 1Q18, the ratio of household debt to GDP dropped from 78.0 percent in 4Q17 to 77.6 percent (while the seasonally adjusted figure stood at 77.7 percent). However, the outstanding household debt in 1Q18 stepped up to THB12.17 billion, or 5.2 percent higher than the same period of 2017, compared to the 4.6-percent growth recorded in 4Q17.

The surge of outstanding household debt was consistent with the high growth seen in retail lending of commercial banks and private consumption, especially spending for durable goods, namely homes and automobiles, according to Kasikorn Bank Research Center

Household debt to GDP was 80.8 per cent and 78 per cent in 2015 and 2017, respectively, and it is expected to drop further to 77.6 per cent this year.

However, for those families coping with debts, the ratio of average debt to annual income has been accelerating at a steady pace.

Debt to income was 82.7 per cent in 2015, rising to 94.7 per cent last year, according to a survey conducted by the National Statistical Office.

Lt-Gen Kongcheep Tantravanich, spokesman of the Defence Ministry, said Sunday that there were about 900,000 informal debtors nation-wide.

He said at the instruction of General Prawit Wongsuwan, the deputy prime minister and defence ministry, the military had stepped in to resolve the informal debt problem which has caused hardships to informal debtors in general, with many of them on the brink of losing their properties.

He said the military had helped in mediating the informal debts with the creditors and managed to settle fair deals for some 537,637 debtors out of a total of about 900,000.

In October alone, he claimed that the military had settled deals for 118,361 informal debtors and returned to 6,119 debtors their assets worth about 7.4 billion baht and 5,334 land title deeds involving 20,000 rai of land which were held by their creditors as guarantee of the debts.

Lt-Gen Kongcheep said police had arrested 161 informal creditors on fraud charges and seized about 80 million baht worth of valuables.

]]>https://www.thailand-business-news.com/banking/70674-thai-military-steps-in-to-settle-over-half-a-million-informal-debt-cases.html/feed070674Ten Years after Lehman: Are we Ready for the Next Crisis?https://www.thailand-business-news.com/banking/70387-ten-years-after-lehman-are-we-ready-for-the-next-crisis.html
https://www.thailand-business-news.com/banking/70387-ten-years-after-lehman-are-we-ready-for-the-next-crisis.html#respondFri, 16 Nov 2018 03:37:54 +0000https://www.thailand-business-news.com/?p=70387

By now, there is widespread agreement that the crisis was caused by excessive risk-taking by financial institutions.

The tenth anniversary of the collapse of Lehman Brothers is a good opportunity for us all to reflect on the global financial crisis and the lessons we have learned from it.

By now, there is widespread agreement that the crisis was caused by excessive risk-taking by financial institutions.

There were increases in leverage and risk-taking, which took the form of excessive reliance on wholesale funding, lower lending standards, inaccurate credit ratings, and complex structured instruments.

But why did it happen?

How could such a crisis originate in the United States, home to arguably the most sophisticated financial system in the world?

At the time, my colleagues and I argued incentive conflicts were at the heart of the crisis and identified reforms that would improve incentives by increasing transparency and accountability in the financial industry as well as government.

After all, if large, politically powerful institutions regularly expect to be bailed out if they get into trouble, it is understandable that their risk appetite will be much higher than what is socially optimal.

So, where are we now, after ten years of reform?

There has been progress in some dimensions: banks have stronger capital positions, and there is emphasis on higher-quality capital. Reliance on wholesale funding instead of deposits has decreased. There is greater oversight of the largest institutions, with stress tests and requirements to submit living wills (resolution plans). Derivative markets are smaller. Bank governance and pay policies have received greater scrutiny.

But much has remained unchanged.

The crisis was resolved in a way that bailed out large institutions, which inevitably makes them more willing to risk insolvency in the future—the so-called “moral hazard” problem.

Safety nets and deposit insurance coverage expanded in countries all around the world. It is particularly difficult to resolve insolvent banks, especially across borders.

This “too-big-to-fail” subsidy not only makes banks more eager to take risk in the future, but also gives them incentives to become larger and more complicated to maximize the subsidy. It is possible to observe in the data how market participants valued this subsidy for large international banks after the crisis, but also by observing simple trends in bank size: From 2005 to 2014, the total asset size of the world’s largest banks increased by more than 40 percent.

This greater concentration and market power in the banking sector is likely to be associated with lower levels of systemic stability. Our research also shows “good” corporate governance of large banks—defined in terms of their board composition, compensation, and independence—is associated with higher risk and lower capital in countries with more generous safety nets, to be able to better exploit them. This suggests that well-managed institutions simply take better advantage of the subsidies for excessive risk-taking, further underlining the severity of the problem.

Another unintended effect of the crisis was the populist reaction. While banks were supported in dealing with the excessive risks they took, insolvent households with subprime mortgages received much less support. It is not surprising that many observers place the blame for the populist backlash we see today against globalization, international finance, and big business on the crisis and the way it was resolved.

A 78% increase in condominium prices

According to the Bank for International Settlements, residential property prices in the Bangkok area have increased 49% in the past 10 years; nevertheless, the increase in condominium prices has been sharper at about 78% during the same period.

The housing NPL ratio rose to 3.4%

The share of high-LTV mortgages, or mortgages with LTV ratios of more than 90%, increased to about 49% of newly originated loans at the end of first-half 2018, from about 34% at the end of 2013, while the median loan-to-income (LTI) ratio rose to around 3.8x at the end of the first-quarter 2018, up from 2.7x during the same period (Exhibit 1).

For Thai banks, housing loans are the only type of consumer loans where the nonperforming loan (NPL) ratio has been increasing: for other retail segments, NPLs have remained stable or improved. The housing NPL ratio rose steadily to 3.4% as of June 2018 from 2.4% three years ago (Exhibit 2).

In addition, household leverage remained high in Thailand at 77% of GDP at the end of June 2018, although the growth rate has slowed.

Mortgages are a big business for Thai banks, accounting for 17% of systemwide loans and about 50% of total retail loans at the end of first-quarter 2018.

As such, the deterioration in the mortgage underwriting quality can have significant effect for banks if the property prices decline substantially.

The macro-prudential guidelines from the BOT follow similar guidelines issued by other countries in the region in the past few years (Exhibit 3).

Fintech is a new financial industry that applies technology to improve financial activities, with key areas being the automation of insurance, trading and risk management.

Between 2005 and 2015, global investment in fintech increased by more than 2200%, from $930m to some $22bn.

Fintech’s potential remains big. From the demand side across much of south-east Asia, the unmet need for basic banking services is significant. KPMG reports that only 27% of the region’s 600 million inhabitants had a bank account in 2016.

From the supply side, a new wave of start-ups is increasingly ‘disaggregating’ global banks. Milken Institute’s Centre for Financial Markets reports that much of the venture capital in Asia has flowed into China, particularly among a handful of large tech companies. Yet other countries also are seeking to position themselves as fintech hubs.

The Straits Times reported that multimillion-dollar investments were reported in 2017 in Hong Kong (in digital wallet operator TNG FinTech Group), in India (in online lending platform Capital Float) and in South Korea’s second largest cryptocurrency exchange, Korbit.

Moody’s Investors Service (“Moody’s”) has today upgraded the Government of Vietnam’s long-term issuer and senior unsecured ratings to Ba3 from B1 and changed the outlook to stable from positive.

The upgrade to Ba3 is underpinned by strong growth potential, supported by increasingly efficient use of labor and capital in the economy.

A long average maturity of government debt and a diminishing reliance on foreign-currency debt point to a stable and gradually moderating government debt burden, particularly if strong growth is sustained over time. The structure of Vietnam’s government debt also limits susceptibility to financial shocks.

The upgrade also reflects improvements in the health of the banking sector that Moody’s expects to be maintained, albeit from relatively weak levels.

The stable outlook reflects balanced risks at the Ba3 rating level

While downside risks may arise from persisting weaknesses in the banking system or if the ongoing trade dispute between the US and China resulted in a sharp slowdown in global trade, there are upside risks from further improvements in debt affordability and better trade performance than we currently project.

Moody’s has also raised Vietnam’s long-term foreign currency (FC) bond ceiling to Ba1 from Ba2 and its long-term FC deposit ceiling to B1 from B2. The short-term FC bond and deposit ceilings remain unchanged at Not Prime. Vietnam’s local currency bond and deposit ceilings remain unchanged at Baa3.

Officials within Thailand and Vietnam are now pushing for regulations to be established with regards to ICOS.

Especially as lawmakers in Vietnam are trying to ensure businesses are not able to participate in activity related to cryptocurrencies until there are clear regulations. Thailand officials are also ready to give similar guidance to the public within their country.

In fact, South Asia in general is now seen as a location whereby there is a lot of activity to be found in regards to initiating regulation around cryptocurrencies.

In fact, South Asia in general is now seen as a location whereby there is a lot of activity to be found in regards to initiating regulation around cryptocurrencies.

In 2018 Vietnam saw state officials request that businesses suspend any crypto related activity until a regulatory framework is established. This includes activity such as consultancy, issuing of cryptocurrency and brokerage.

They have also issued a warning to potential cryptocurrency investors, using a lack a regulation as a risk factor that needs to be taken into consideration.

Just before this request was made by state officials a deputy director at the Ministry of Justice in Vietnam said that the anonymous nature of cryptocurrency transactions made them potential dangerous and open to criminal activity.

A warning to cryptocurrency investors

Officials in Thailand stated that a recent study on investment capital in ICOs showed that 95% of these ventures will actually fail, but the 5% that didn’t fail were seen to be very profitable. The Thailand Security and Exchange Commission believe that high risk, high failure rate investments such as these need oversight from the Government.

Thailand has recently seen a cryptocurrency exchange named Jibex open its doors within the country. To start with only five cryptocurrencies will be supported; bitcoin, bitcoin cash, ether, Litecoin and ripple, with more expected to be added in the future. A wallet supporting these currencies is also offered by the exchange.

There are many who would hope that it would lead to the country embracing cryptocurrencies in other aspects of the economy and maybe may even help bring about change in gambling legislation.

As it is well known that the crypto world makes transactions secure and fast, whilst being cost effective; which may help alleviate concerns officials may have with gaming. This would be great news for SBOBET and other popular online gaming sites, but we can only wait and see what the future holds.

Vietnam has seen the introduction of the Kenniex cryptocurrency exchange, in Ho Chi Minh City and is the first live cryptocurrency exchange in the country. Bitcoin can be converted into VND or VND into bitcoin via the exchange.

2013 saw the Central Bank of Thailand declare that Bitcoin was illegal, however this was then reversed in 2014, but buying Bitcoin within Thailand and trading it internationally was still illegal.

A law was recently put into place in Thailand to control and regulate cryptocurrency transactions and initial coin offerings, it comes with jail terms and heavy fines in an attempt to regulate cryptocurrency trading and prevent illegal activity.

A law was recently put into place in Thailand to control and regulate cryptocurrency transactions and initial coin offerings

A royal decree has been enacted which insists that cryptocurrencies and digital tokens are digital assets and the Thailand Securities and Exchange Commission will now be in charge of overseeing and regulating crypto transactions moving forwards.

Vietnam saw their government ban Bitcoin in 2014 but now want to streamline and monitor the industry, enabling them to tax and monitor it.

Last year they issued a decree that determined digital currency is not a valid or legal means of payment and that anyone violating this could face hefty fines. The government have regularly issued warnings on the risks associated with digital currencies, which actually led to a ban on them.

Moody’s Investors Service says that changing environmental, social and governance considerations can affect sovereign ratings.

“Such considerations — commonly referred to as environmental, social and governance (ESG) risks — have become of increasing importance to investors over the last several years, and Moody’s has a long track record of assessing these considerations, focusing on their impact on a government’s ability to make debt payments,” says Gabriel Torres, a Vice President Senior Credit Office in Moody’s Sovereign Group.

“Certain ESG risks are already captured directly as indicators in our sovereign rating methodology, while others influence subfactors and indicators that support our credit analysis,” adds Torres. “At the same time, we acknowledge that it is rarely possible to identify the precise impact of such risks on a particular sovereign’s rating.”

Moody’s conclusions are included in its just-released report “Sovereigns — Global: Environmental, social and governance risks influence sovereign ratings in multiple ways”.

Moody’s report points out that, while ESG is often spoken of as a single, homogeneous category of risk and while the three overlap in some respects, they are also quite distinct from one another.

Accordingly, it is important to appreciate their distinctness if they themselves are to be properly understood, and measures to address each are to be properly assessed.

Of the three E, S and G risks, G has the strongest quantitative relationship with both sovereign ratings and Moody’s four methodology factors: economic strength, institutional strength, government fiscal strength, and susceptibility to event risk.

Specifically, Moody’s assessment of institutional strength includes measures of government effectiveness, rule of law, and control of corruption.

Governance risks are also relevant to Moody’s assessment or political risk, since weak governance raises the risk that political tensions or conflict have an impact on a country’s economy or public finances.

Meanwhile, both E and S can influence Moody’s assessment of economic, institutional and, to a lesser extent, fiscal strength.

Environmental credit considerations relate to the physical conditions in which societies operate, both at present and in the future. The latter draws in the impact of climate changes, as well as the global transition to less carbon-intensive economic development.

And social considerations encompass threats to a sovereign’s credit profile that derive from society’s characteristics and structure. Such considerations include, among others, the fiscal, economic and political implications of social conditions such as poverty, inequality or violence and crime.